Its Leader on Sidelines, Regulator Faces Biggest Test in MF Global

A few days before MF Global’s collapse, regulators stationed at the firm were assured its books were in order.

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Gary Gensler

Their boss, Gary Gensler, was not convinced. A former Goldman Sachs partner who once passed the test for certified public accountants, he bore into the numbers himself and grew uneasy with the firm’s finances.

“Keep pressing them,” he told his regulators, according to people with direct knowledge of the conversation.

Within days, his suspicions were confirmed. More than $600 million in customer money was missing from MF Global, prompting an investigation by Mr. Gensler’s Commodity Futures Trading Commission.

As the regulator intensifies its inquiry into MF Global and the firm’s former leader, Jon S. Corzine, the agency must do without its hard-charging chairman. Last week, Mr. Gensler stepped away from the investigation amid questions over his relationship to Mr. Corzine, his former boss at Goldman Sachs and a fellow Democrat.

Now, the worry is that the commission will stumble in its rare turn on center stage without its star leading the way.

Mr. Gensler’s withdrawal from the investigation came despite apparently only loose ties to Mr. Corzine. The men have seen each other just a handful of times since Mr. Gensler left Goldman Sachs in 1997. Mr. Gensler did not attend Mr. Corzine’s 2010 wedding. And Mr. Corzine did not attend the funeral of Mr. Gensler’s wife, a noted artist who died of breast cancer in 2006.

Mr. Gensler’s recusal puts the C.F.T.C. at a potential disadvantage as it embarks on its most high-profile investigation since its founding in 1974.

Under Mr. Gensler, the commission had begun to shed a reputation as a toothless watchdog, bringing a record number of enforcement cases while writing new rules to police Wall Street.

At the same time, the agency’s budget is under attack on Capitol Hill and it faces questions over its handling of MF Global. Lawyers and MF Global clients have questioned why it is taking so long to recover money that should have never been missing at all.

“There is a huge spotlight on the agency now,” said Scott Talbott, a lobbyist for the Financial Services Roundtable, a Wall Street trade group.

Mr. Gensler has been Washington’s most aggressive ambassador to Wall Street, introducing sweeping new rules to crack down on excessive risk taking.

Even industry groups acknowledge his influence, though they are not fond of his aggressive tactics. He can be difficult, colleagues said. And his unshakeable faith in regulation has left some fearful the agency will jeopardize Wall Street’s anemic recovery and broader economic growth.

“It may be useful for Chairman Gensler in the short run to be viewed as an opponent of the financial industry, but to be successful in the long run, the C.F.T.C. will have to produce workable regulations that do not damage the economy too much,” said Steven Lofchie, a partner at Cadwalader, Wickersham & Taft. “The jury is still out on whether the C.F.T.C. can do that.”

Wall Street scourge is an unlikely addition to the resume of Mr. Gensler, a 54-year-old marathon runner and father of three daughters.

Mr. Gensler grew up in Baltimore, the son of working-class parents who never went to college. His father was a cigarette and pinball machine vendor to local Baltimore bars. After graduating from public school, Mr. Gensler attended the Wharton School at the University of Pennsylvania for his undergraduate degree and master’s in business administration.

He spent 18 years at Goldman Sachs, where he was a star dealmaker in New York and Tokyo before ascending to the position of co-head of finance. After leaving the firm in 1997, a multimillionaire, he joined the Treasury Department under President Bill Clinton. It was then that the agency presided over the broad deregulation of Wall Street, and the very markets Mr. Gensler now monitors.

Citing that past, liberal lawmakers held up Mr. Gensler’s 2009 nomination to the C.F.T.C., worried he was too sympathetic to Wall Street’s ways.

Those critics were largely silenced after Mr. Gensler took a lead role in helping write the Dodd-Frank Act, the regulatory overhaul passed in the wake of the financial crisis. Mr. Gensler played a major role in writing portions of the law that deal with financial derivatives, the complex contracts at the center of the crisis. That market has exploded in size over the last decade, and is now pegged at $600 trillion.

Ties in Focus

But his former ties to Goldman and Mr. Corzine came into focus again last week. The two men spent nearly 18 years together at the Wall Street firm. In the early 1990s, Mr. Gensler, who has completed nine marathons, ran the New York City Marathon, borrowing Mr. Corzine’s running number when his boss was unable to compete in the race.

Years later, when Mr. Corzine ran for governor of New Jersey, Mr. Gensler supported his campaign with a $10,000 check. An active Democrat who worked for the presidential campaigns of Hillary Clinton and Barack Obama, Mr. Gensler has contributed nearly $300,000 to the party since 1990, according to the Center for Responsive Politics.

Late last year, Mr. Gensler and Mr. Corzine served on a panel on banking at Princeton University.

Fearful that their Goldman connection could be perceived as a conflict, Mr. Gensler stepped away from the investigation after Oct. 31, the day of MF Global’s bankruptcy.

The move appeased Republican critics, who were pushing for Mr. Gensler to recuse himself. Still, his supporters say it will free up his time to focus on another pet peeve of conservatives: Dodd-Frank.

In his office, Mr. Gensler keeps an autographed copy of the 2,300-page law. The namesake author of the law, Representative Barney Frank, Democrat of Massachusetts, even signed a special note to the regulator, saying “you should derive satisfaction from this,” a nod to the derivatives industry that Mr. Gensler now watches over.

The C.F.T.C. chairman is also known around the office as an mountain climber. Since he no longer has the time to run marathons, he takes the stairs every day to his ninth-floor office. Colleagues say he has a penchant for walking the halls in socked feet, which he props up on his employees’ desks when chatting with them.

Those who work with Mr. Gensler say his attention to detail is exhaustive. He dives into Wall Street minutiae with an aggressive — some say obsessive — fervor. This summer, when finalizing an obscure detail of a new rule, Mr. Gensler missed a dinner party for his sister.

Some say Mr. Gensler can be a tough, at times stubborn, negotiator. On one recent occasion, when at odds with another regulator about a contentious rule, Mr. Gensler wouldn’t budge, saying: “I believe this to my core.” He co-wrote a book called “The Great Mutual Fund Trap” critical of an industry where his twin brother, Robert, works as an executive at T. Rowe Price.

And in an austere environment for government, Mr. Gensler has sought to roughly double the agency’s budget and staff.

He has also expanded the agency’s regulatory firepower with a number of crucial hires. A top derivatives lawyer, Gary Barnett, was poached from Linklaters, to bolster his Dodd-Frank forces. He also hired David Meister, a former partner at the law firm Skadden, Arps, Meagher & Flom and former federal prosecutor, to revamp the agency’s enforcement effort.

The expansion appears to be bearing fruit. The last fiscal year, the agency brought a record 99 enforcement actions, 74 percent more than the previous year. It has also levied record fines of nearly $300 million.

MF Global is the agency’s biggest enforcement test yet.

Whether the scandal will burnish or tarnish the reputation of the agency, as well as that of Mr. Gensler, will depend on how quickly authorities can locate the missing money and pinpoint what went wrong.

As MF Global was rushing to save itself through a sale, Mr. Gensler was sounding alarms that customer money could be missing. He called the firm’s lawyer, H. Rodgin Cohen, to ask for proof that the firm was separating its money from that of its customers. As a patchwork of regulators descended on the firm, Mr. Gensler served as a clearinghouse for information, firing off e-mail updates for other regulators as well as his own staff, responsibilities typically handled by less senior officials.

At 2:30 a.m. on Oct. 31, Mr. Gensler received a call from his staff still camped out at MF Global’s offices: more than $600 million in customer money was missing. He spent the next five hours in his bathrobe on a conference call with fellow regulators.

Amid the chaos that day, Mr. Gensler was also frantically searching his suburban Maryland home for a glove to complete his daughter’s cavewoman Halloween costume.